ODAC Newsletter - 01 August 2008
Welcome to the ODAC Newsletter, a weekly roundup from the Oil Depletion Analysis Centre, the UK registered charity dedicated to raising awareness of peak oil.
Record quarterly profits at BP and Exxon will fuel public anger about high fuel prices, but the big numbers obscure a trend of falling production. Shell, Exxon and Chevron saw overall production declines, while BP runs the risk of losing control of TNK-BP accounting for about a quarter of its production. The resumption of attacks in Nigeria this week continued to impact Shell’s production and increasing reliance on tar sands is environmentally disastrous and politically controversial.
In the UK the results which have drawn the most ire are those of Centrica, the parent company of British Gas, which announced profits of nearly £1bn in the same week in which BG announced a record price hike of 35% for gas. With wholesale gas prices falling sharply this week the profits have renewed calls for the introduction of windfall taxes.
The background picture on gas is however no better than for oil. With decreasing output in the UK and the rest of Europe, reliance on imports is increasing. Russia, already the biggest player in the game, is using its influence to further sew up the market. A recent deal with Turkmenistan threatens Europe’s ability to secure an alternative gas supply via the favoured Nabucco pipeline, while discussions in the Ukraine over transit costs could impact the price of current supplies. For the UK which has built an infrastructure based on cheap gas this is a bleak picture indeed.
China continued to ramp up for the Olympics this week amid increasing power cuts. Let us hope this is not a taste of things to come in London 2012.
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BP reported the biggest-ever quarterly profit for a British company but warned of the risks of doing business in Russia and promised to fight to defend its interests there.
Soaring oil and gas prices helped push underlying net profit up 56 per cent to $8.6bn (£4.3bn) in the second quarter.
Tony Hayward, the chief executive who took over last year, has been trying to turn the company round after years of disappointing performance and yesterday’s figures showed signs that his efforts may be bearing fruit.
However, BP’s shares have been under pressure because of its problems in Russia. The group is facing a bitter battle for control of TNK-BP, its joint venture owned 50-50 with the Alfa-Access-Renova group of Russian billionaires.
The shares slipped again yesterday, in spite of the better-than-expected results, and closed down 12¾p at 506¾p.
Mr Hayward said BP would “defend robustly” its rights under the shareholder agreement setting up TNK-BP and threatened legal action against AAR.
He advised other international companies looking to do business in Russia to “tread with caution”, reinforcing BP’s message that the pressure on TNK-BP from AAR and Russian authorities would damage the confidence of international investors.
Mr Hayward also said Robert Dudley, chief executive of TNK-BP, could remain at the head of the company while outside Russia only for a matter of months.
Mr Dudley left Moscow last week following AAR’s sustained campaign to remove him.
He is still running TNK-BP from an office somewhere in central Europe but Mr Hayward’s comments showed that unless Mr Dudley returns to Russia fairly soon, BP will be forced to bow to AAR’s demand that he be replaced.
BP’s quarterly profit will remain the UK’s biggest ever if, as expected, Royal Dutch Shell reports an underlying net profit of about $8.3bn tomorrow.
Production for the second quarter at BP was broadly flat compared with the same period in 2007 – at 3.83m barrels of oil equivalent per day. However, excluding the effect of production sharing contracts, which give more oil to the countries where BP operates as the price rises, underlying production was up 6 per cent.
Profits at the refining division collapsed from $2.7bn to $539m as margins were squeezed, especially in the US.
Vivienne Cox, the head of BP’s alternative energy business, including biofuels, wind and solar, said BP had talked to possible strategic partners about taking a stake and was reviewing options to “expose the value” of the unit, but had “no plans” to float it off.
BP said it would pay a dividend of 14 cents a share for the quarter, up 29 per cent from the 10.825 cents paid in the equivalent period of 2007. It has shifted away from share buy-backs and towards dividends as a way to distribute cash.
Colin Smith, analyst at Dresdner Kleinwort, said BP had a superior short-term growth outlook than Shell.
“The bears would say BP is not investing as much for the future, but it does not necessarily need to.
BP is doing well right now.”
Exxon Mobil corp. and Chevron Corp. may report their lowest production since 2005, leaving investors reliant on record energy prices to drive profit gains at the largest U.S. oil companies.
Second-quarter output fell more than 5 percent, the most in at least a decade, at Irving, Texas-based Exxon Mobil, said Jason Gammel, an analyst at Macquarie Bank Ltd. in New York. San Ramon, California-based Chevron Corp. estimated July 10 that it pumped 3.4 percent less oil and gas than a year earlier.
While Exxon Mobil and Chevron will report record earnings this week, according to analyst estimates compiled by Bloomberg, the companies are having their largest stock declines since 1982 and 2002, respectively. Share drops wiped out $90 billion in market value this year, even as oil surged above $140 a barrel.
"They've been throwing a lot of money at new projects and it begs the question of how long is it going to be before we start to see production increase," said Barry James, who manages $2 billion, including Exxon Mobil and Chevron shares, as president of James Investment Research in Xenia, Ohio.
After its latest output decline, Chevron will need to pump 7.5 percent more petroleum in 2008's second half to meet its full-year forecast. An increase that big would be six times the biggest ever achieved by Chief Executive Officer David O'Reilly without an acquisition.
More than a third of Exxon Mobil's production drop stemmed from contracts with oil-rich nations that give governments and state-owned oil companies a bigger share of output when prices rise, Gammel said in a July 25 interview.
Exxon Mobil is expected to report tomorrow that second- quarter net income rose 26 percent to $12.9 billion, the highest ever for a U.S. company without one-time gains, according to the average of seven analyst estimates compiled by Bloomberg. Chevron , which is slated to release earnings Aug. 1, probably netted $5.95 billion, an 11 percent gain, estimates indicated.
The companies held 1.4 percent of the world's proved oil and gas reserves at the end of 2007.
Exxon Mobil and Chevron budgeted almost $48 billion in capital spending this year, more than 75 percent of which is aimed at boosting production and stemming declines in reserves.
Chevron cut its 2008 forecast in February to 2.65 million barrels of oil equivalent a day, partly on the effects of price triggers in production-sharing agreements. The company fell more than 4 percent short of that pace in the second quarter.
Countries such as Russia and Venezuela reduced or cut off foreign access to their oil riches, leaving international producers with fewer projects to pursue.
As Exxon Mobil and Chevron spend a combined $100 million a day to find and develop new deposits, they're funneling even more cash to stock buybacks and dividends. If it maintains its first-quarter pace of buybacks, Exxon Mobil will repurchase $38 billion of stock this year, or almost $104 million a day.
For Exxon Mobil, repurchasing stock is preferable to investing in oil and gas projects that won't produce at least a 30 percent return, James, the James Investment Research president, said in a July 25 interview.
"I like buybacks and in this environment, that's often the best investment they can make," James said. "One of the things I really like about Exxon is that unless a project is going to really hit their target return, they won't do it."
Investors want to know if the company's gas-export projects in Qatar will begin later this year as scheduled, Gammel said. The developments are slated to account for 42 percent of new output this year, Exxon Mobil's largest source.
Chevron may be close to starting its $5.4 billion Agbami development off the coast of Nigeria, the company's largest new project this year, Gammel said.
Exxon Mobil Chief Executive Officer Rex Tillerson, 56, and Chevron's O'Reilly, 61, declined through spokesmen to be interviewed for this article.
Each $1-a-barrel increase in oil prices boosts Exxon Mobil's earnings per share by 11 cents and Chevron's by 16 cents, according to William Featherston, an analyst at UBS Securities LLC.
Regardless of profit gains, the companies are struggling to show they can stop declines in output as crude prices slide from all-time highs. Oil futures closed yesterday at $122.19 a barrel on the New York Mercantile Exchange, down 17 percent from their high of $147.27 set on July 11. Exxon Mobil has dropped 14 percent this year in New York Stock Exchange composite trading. Chevron is down 11 percent.
The Standard & Poor's index of major U.S. oil companies has fallen 12 percent, the worst performance since 2002. Profits at Exxon Mobil and Chevron that year tumbled 25 percent and 66 percent, respectively.
"More important than how they did in the June quarter will be some sign of production growth going forward," said Robert Sweet, who helps manage $170 million at Horizon Investment Services LLC in Hammond, Indiana.
Royal Dutch Shell unveiled a 5 per cent increase in second quarter profits to $7.9 billion, missing forecasts as the oil giant revealed it had suffered a steep plunge in earnings from its chemicals division. These fell to a $142 million loss from a profit of $494 million for the three months to June.
Shell also said it was suffering from weak performance in its refining and marketing division.
Oil and gas production, including oil sands, also fell to 3.126 million barrels per day from 3.178 million.
The bulk of profits were derived from Shell’s exploration and production division, which posted a $5.9 billion profit up from $3.1 billion last year, boosted by soaring oil prices which ended the quarter close to a record $147 per barrel.
Jeroen van der Veer, Shell’s chief executive, said the results were “competitive”
“Shell is making substantial, targeted investments to grow the company for shareholders and help ensure that energy markets remain well supplied. Spending is increasing on new acreage and selective acquisitions as we refresh the portfolio with new options for future growth.”
There are strong indications that Nigeria, the sixth biggest oil producer in the world and Africa's biggest oil producer, can no longer meet the Organisation of Petroleum Exporting Countries (OPEC) production quota.
The country's current production level has dropped below 1 million barrels per day (mbpd) owing to frequent shut-ins due to renewed attacks on oil facilities in the Niger Delta region.
Prior to the escalation of violent attacks on oil installations, Nigeria produced between 2.5 and 2.6 million barrels of crude oil per day.
The country with its abundant oil potentials has the capacity to produce about 3.2 million barrels of oil per day.
Between late last year and January, this year, Nigeria's crude production had appreciated following a directive by the Federal Government that oil companies operating in the country should increase output from the deep offshore fields.
Sequel to the increase in crude production, Nigeria was able to meet its daily production quota of 2.1 million barrels per day allocated to her by OPEC.
However, following the recent upsurge in attacks on oil companies' facilities, particularly the Royal Dutch Shell that produces about 20 per cent of the nation's oil, coupled with theft of oil in the region, Nigeria's oil production is now less than 1 million barrels per day, far below the 2.1million barrels OPEC mark.
An official of the Ministry of Energy confirmed last night that, "Nigeria at the moment cannot meet OPEC quota, because production has gone down below 1 million barrels per day."
"How can we meet the OPEC quota when we now produce less than 1 million barrels per day. This is the lowest level so far recorded. There is serious problem and it does not look like the end is near.
"Only recently, Bonga field was attacked. We are yet to recover from that one. The militants have continued their attacks, and others facilities have been hit.
"The NPDC is not producing because of Niger Delta crisis. Where are we going from here," the official said.
The attack on Bonga, Nigeria's biggest offshore facility and Chevron installation in June had resulted in the shut in of about 250,000 barrels per day.
Before then, Shell, the worst hit, had a shut-off of about 400,000 barrels per day owing to incessant attacks on its facilities by militant groups in the region.
The attacks on Shell has not only adversely affected Nigeria's crude quota, but has robbed the country, since oil accounts for more than 80 per cent of its foreign earnings.
In its recent report, OPEC had noted that Angola had topped Nigeria in terms of crude production due to crisis in the oil-rich Niger Delta.
Reacting to the report by OPEC, Minister of State for Energy (Petroleum), Odein Ajumogobia, SAN, had told newsmen in Madrid, Spain, that the OPEC statement came in the wake of the attacks on Shell Bonga field and Chevron facility, which had resulted in the shut in of about 250,000 barrels of oil per day.
He said Nigeria's output at that time (early this month), stood at about 1.886 million barrels a day.
"Our production levels currently are about the same and because of the issues in the Niger Delta, it fluctuates. In fact, at the time that statement was made, we just lost about 250,000 barrels to separate attacks on Bonga and Chevron. It is also of utmost importance to say that Nigeria's capacity is actually over 3 million barrels per day and half of the shut in capacity is the direct consequence of the issues regarding the security in the Niger Delta area.
"There are security challenges in the Niger Delta, but there is no doubt that we are facing those challenges, through the process of enhancing security in the area. We recognise the issue as very important, and have to confront it for us to grow production," he said.
However, the production level, which has been hovering between 1.8 million barrels and 2 million barrels per day, has reduced drastically from the about 1.4 billion mid this month to below 1 million, causing shivers in the industry sector that it may take some time before the production could boom again.
Nigeria's crude oil has been the preferred grade in the international market due to its low sulfur content.
Nigeria's crude oil production which had hovered between 1.8 million and 2 million barrel per day had dropped further, as the Shell Petroleum Development Company (SPDC) Monday shut in production of 130,000 barrels per day owing to an attack on its Nembe Creek trunk line.
The Movement for the Emancipation of the Niger Delta (MEND) had last week vowed to renew pipeline attacks within 30 days in protest against a statement credited to the Acting Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Alhaji Abubakar Yar'Adua, that the corporation paid militants about $16 million to enable it access the damaged Chanomi Creek pipeline for repairs.
The corporation had since debunked the report, insisting that it paid the communities and not any militant group in order to have access to the pipeline.
Niger Delta militants had earlier blown up the Chanomi Creek pipeline, which feeds the Warri and Kaduna Refineries in 2006.
The development had forced the country to import all its petroleum products as the two refineries as well as the Port Harcourt Refinery were out of operation.
MEND spokesman, Jomo Gbomo, who signed the statement, had said the action was "in keeping with our pledge to resume pipeline attacks within the next 30 days".
The Nembe Creek line was last attacked on May 26, prompting SPDC to declare a "force majeure" on Bonny Light crude exports for June and July.
Force majeure is a legal clause that allows producers to miss contracted deliveries because of circumstances beyond their control.
Iraqi oil production has risen to its highest level since the 2003 invasion on the back of improved security across the country, according to a new US government report.
Iraq pumped an average of 2.43m bpd between April and June, according to the special inspector general for Iraq reconstruction.
The report by the Special Inspector General for Iraq Reconstruction (Sigir) said the combination of record production and high global oil prices would likely provide a windfall to the Iraqi government, which previously forecast that 2008 oil revenues would be $35bn (€22bn, £18bn).
“With oil now hovering around $125 per barrel – about five times what it was five years ago – and Iraq’s oil production at record levels, Sigir estimates that oil revenues for 2008 could exceed $70bn,” said Stuart Bowen, the inspector-general in his quarterly report to Congress.
Sigir attributed the record production to the decline in violence across Iraq, in addition to a special exclusion zone created to protect a pipeline that runs from the oil-rich city of Kirkuk to the oil-refining city of Baiji.
It also acknowledged that the success of the $34m project was underscored by there having been no attacks on northern pipelines this year. Iraq is now extending the pipeline exclusion zone from Baiji to Baghdad.
Senior Bush administration officials argued before the war that Iraqi oil revenues would pay for reconstruction. But the US was left footing huge reconstruction bills as the dire security situation prevented Iraq from hitting pre-war levels of oil output.
The increasing oil revenues in Iraq have created budget surpluses that, earlier this year, prompted the US Congress to pass legislation ensuring that US reconstruction aid would be conditioned on Iraq stepping up its own spending.
The Sigir report comes as violence in Iraq has dropped dramatically from the high levels in late 2006 and early 2007, which was the most bloody period in Iraq since the 2003 invasion.
July is on course to see the lowest number of US military deaths since the war began. Iraqi fatalities – civilian and security forces – have also declined dramatically, despite the fact that the Iraqi army has undertaken a number of high-risk military operations across the country.
General David Petraeus, the top US commander in Iraq, is preparing to provide President George W. Bush with recommendations for troop levels in Iraq before early September.
During the past few months, the US has withdrawn the five combat brigades that made up the “surge” that was sent to Iraq last year. The Pentagon hopes the declining violence will allow the withdrawal of a further one or two brigades – up to about 7,000 troops – later this year.
In his report, Mr Bowen also warned that a security agreement being negotiated between Iraq and the US could have dramatic implications for reconstruction if it strips foreign contractors of immunity from Iraqi law. The issue took on more urgency for the Iraqi government after employees from Blackwater, a US private security company, last year were accused of shooting innocent Iraqi civilians in Baghdad.
“The removal of immunity could lead to a contractor exodus, which would impose significant limitations on US relief and reconstruction operations,” Mr Bowen said.
The Economic Development Ministry cut its forecast Monday for 2008 oil production as output declines at older fields in Siberia, but the new figure remains just above last year's production.
The ministry now forecasts annual production of 492 million tons, 3 million tons less than previously predicted, Deputy Economic Development Minister Andrei Klepach said.
Russia, which produced 491.3 million tons of oil last year, will have the smallest growth in production since 1998 should the ministry's forecast prove accurate. Prime Minister Vladimir Putin's government has approved tax breaks to encourage new projects in challenging environments and is considering additional measures to boost output.
The government has raised its estimate of the average Urals price for 2008 to $112 a barrel, up from $92, Klepach said, citing record energy prices worldwide.
· Ethical investment groups try to halt tar sand projects · Oil firms to spend $125bn to exploit new sources
Shell, BP and other oil companies at the centre of the tar sands revolution in Canada are facing a backlash from the Co-operative and other members of the ethical investment community determined to bring a halt to these operations for environmental reasons.
A joint report from Co-operative Investments and the wildlife charity WWF released today will be followed up in September by a meeting of the UK Social Investment Forum (UKSIF) to press for an end to this carbon-intensive activity.
The tar sands business, by which crude oil is produced through highly carbon and water-intensive extraction and treatment procedures, risks tipping the world into an irreversible process of global warming, critics claim.
The Co-op and WWF are calling for a global halt to new licensing for tar sands and similar oil operations known as "unconventional fuels".
They want the UK and other countries to prohibit the sale and distribution of any oil products with higher emissions than traditional petrol.
The move comes as Shell and other industry leaders have pledged to spend more than $125bn (£63bn) by 2015 to develop these new sources of petrol at a time of very high crude prices and fears of supply shortages.
The oil companies say the world needs these reserves, which are expensive to produce but are located in a politically stable area, unlike the traditional reserves of the Middle East or Russia. But critics say the environmental price is disastrous.
Paul Monaghan, head of social goals and sustainability at the Co-op group, said: "The current rush to invest in unconventional fossil fuels is wholly inappropriate and, due to their carbon intensity, these projects risk dangerous levels of climate change."
The new report, Unconventional Oil: Scraping the Bottom of the Barrel, will be used as the basis for discussion with the Co-op's 6.5 million customers and for garnering support from more than 200 other members of the UKSIF.
James Leaton, senior policy officer at WWF-UK, said: "Unconventional fuel sources may seem attractive in the short term but ultimately the environmental and economic costs are unthinkable.
"Companies and investors claim to recognise the need to tackle climate change and support international efforts such as Kyoto [climate change protocol]. In oil sands we have an activity that is going against this imperative and undermining Canada's Kyoto commitments, so it is time for investors to challenge this strategy."
Shell said: "The global demand for energy is growing. This will mean greater demand for oil and gas, too. Supplies of accessible, conventional oil and gas cannot keep up with the demand growth. As a result, society has little choice but to add other sources of energy including 'unconventional' fuels like oil sands."
BP said fossil fuels were still going to be needed well into the future even if there were tough restrictions on carbon dioxide emissions.
"Reserves of oil sands represent a significant untapped resource from a politically stable country. The Husky joint venture [BP is planning] will use a process known as steam-assisted gravity drainage, not mining, which produces oil in-situ with a significant reduction of both water use and overall environmental footprint," it said in a statement.
BP added that it was a "keen" supporter of mandatory market mechanisms such as cap-and-trade programmes on greenhouse gases: "We support national and international trading programmes and have factored the future costs of carbon in our analysis of the project's value."
The US Treasury will today make its strongest case to date that soaring oil prices are being driven by a combination of strong demand and tight supply rather than speculative trading or the weak dollar.
David McCormick, undersecretary of the Treasury for international affairs, will say in a speech that the administration is not "dismissing" speculation or currency completely, but is putting them in "proper perspective".
"We must not let concerns over these second-order factors distract us from focusing our attention on the root cause of dramatic increases in price - a growing gap between the world's desire to consume oil and its capacity to produce it," Mr McCormick will tell the Peterson Institute for International Economics, a Washington think-tank, according to a copy of the remarks obtained by the Financial Times.
Energy policy has taken centre-stage on Capitol Hill this week following last week's passage of sweeping housing legislation. Efforts by congressional Democrats to advance new energy legislation that would restrict speculation in commodities trading and increase transparency in the energy markets suffered a setback on Friday when Republican legislators in the Senate blocked the bill.
In an effort to break the deadlock, Democrats yesterday offered to allow four amendments to the bill, in effect paving the way for Republicans to put their priorities, such as increased drilling, up for a vote. However, it is still unclear whether this concession will be enough to satisfy Republicans and create a consensus in favour of new legislation before the August congressional recess, which begins on Friday.
"I'm not optimistic by the end of this week, when we're scheduled to adjourn before August, we're likely to see legislation in this area passed unless there is a change of heart," said Jeff Bingaman, the New Mexico senator and Democratic chairman of the Senate energy and natural resources committee.
In his speech today, Mr McCormick will say there are "no easy solutions" to rising energy costs, which he will describe as a "burden on American families and the US economy, as well as families and economies around the world".
"Ultimately, a complete package of actions must be taken by energy producers and consumers alike to reduce oil consumption, increase the diversity of energy supply, and put prices on a lower and more stable trajectory."
British Gas is to raise gas prices by 35 per cent, the biggest increase imposed by a leading energy company, adding to inflationary pressures in the economy and raising fears about fuel poverty.
British Gas is the UK’s largest energy supplier, selling gas to 10m households. Of these, the 5m households that buy both their gas and electricity from British Gas face a 25 per cent jump in their bills. About 1m households that only buy electricity from the company will pay 9.4 per cent more.
The decision, which followed smaller energy group EDF Energy raising its gas bills by 22 per cent and its electricity bills by 17 per cent on Friday, is likely to be followed by similar rises by other leading suppliers.
Higher energy bills will drive household inflation up from the current level of 3.8 per cent, which is already almost double the government’s target of 2 per cent, and will make the prospect of interest rate cuts less likely.
Several economists forecast that, in the wake of British Gas’s action, the Consumer Prices Index would rise from 3.8 per cent to reach 5 per cent by the autumn.
George Buckley of Deutsche Bank said: “Whichever way one looks at it, inflation is likely to peak at close to 5 per cent over the coming months – probably in September.”
British Gas’s parent company, Centrica, which on Thursday reported a 19 per cent fall in first-ha;f profits to £992m, blamed the action on the high wholesale price of gas. The company said operating profits for British Gas Residential, its household supply business, had fallen to £166m in the first half of 2008, from £533m in the first half of 2007.
Wholesale gas prices have fallen this month as the oil price has retreated from its record highs, but remain much higher than a year ago.
Centrica supplies 20-25 per cent of the gas British Gas needs from its own gas fields, including the large Morecambe Bay field in the Irish Sea. Its upstream gas production division is expected to report strong profits on Friday.
Joe Malinowski of energy switching website TheEnergyShop.com said that while British Gas profits were being squeezed by rising gas costs, Centrica’s gas production business was benefiting. “They will be making very good money on the upstream side, and the question is whether they should have used some of that to keep bills down.”
In a response to MPs’ calls for a windfall tax on energy companies in order to help customers struggling to pay their bills, British Gas said the bill increases would be postponed until next April for the 340,000 customers qualifying for its ‘Essentials’ tariff. This tariff is aimed at customers who receive state benefits.
British Gas owner Centrica unveiled a near-£1 billion profit this morning, just hours after unveiling the largest energy price hike in UK history, of up to 44 per cent.
Centrica said group operating profits were £992 million for the first half of 2008, 20 per cent lower than the same period last year.
Centrica chief executive Sam Laidlaw claimed the steep rise in energy bills was necessary because of rising wholesale energy prices and the need to invest in new sources of low carbon energy.
“The UK is no longer self-contained from an energy perspective,” said Mr Laidlaw. “The wholesale price of gas has gone up by 90 per cent. If we are going to remain a viable business then this price rise is necessary.”
He rejected claims that UK consumers were now paying among the highest gas bills in the world, claiming that Europeans were still being charged more, although he acknowledged that “we are catching up”.
Nick Luff, Centrica’s finance director, said that Centrica was only able to source 30 per cent of its gas supplies from its own fields, including one at Morecanmbe Bay.
It needed to import the remainder from countries such as Norway and Holland and was thus having to pay international prices fopr them.
The results contained a 69 per cent plunge in profits from British Gas Residential, its UK household supply business, to £166 million from £533 million in 2007.
The bulk of profits came from British Gas Services, its central heating repair and maintenance arm, and from Centrica Energy, its wholesale arm.
Centrica said its tax bill had risen to £577m, up from £411 million.
The company said it was paying up to 75 per cent on its Morecambe Bay and other gas production fields and claimed to be the second highest tax payer in the FTSE 100, at a rate of 58 per cent of group profits.
It is the biggest gas price rise in British history and probably the most badly timed. Only a day before the announcement by British Gas that household bills would rise by a third, the wholesale gas price fell off a cliff.
Last week a utility could buy gas on the spot market for next-day delivery at about 60p per therm. On Tuesday the price had fallen to 33p per therm. If British Gas was in the market on Tuesday evening, filling up its portfolio with short-term gas supplies, it did some very good business.
Of course, it is more likely to be bad timing than cynical opportunism. Spot gas prices are notoriously volatile and consumer price rises of this importance and magnitude are not decided over lunch. British Gas was doubtless as surprised as other gas traders by the scale of the market collapse on Tuesday.
The reasons for the sudden weakness are many, say market operators, who point to the start-up of several North Sea fields that were out of commission for maintenance, and the warm weather.
But these factors are known. What is more interesting are signals of weakening demand – the oil price has been falling steadily from its peak of $140 per barrel last month to current levels of $122. Is the company rushing to get its price increase in place to lock in profit before the gas price begins to slide? Across most of Europe, gas is sold under long-term contracts linked to oil products and coal. Britain alone has an effective spot market in gas, but because we are no longer self-efficient and must import gas by pipeline from Norway and Belgium, our gas price has become linked to the oil price.
Niall Trimble, a gas consultant with the Energy Contract Company, reckons that the gas market is fundamentally weak. “Until recently, the price has been buoyed up by sentiment and high oil prices,” he said.
The question is whether British Gas sees the evidence of weakening demand that is beginning to excite the spot gas traders. Unlike other utilities, British Gas is in a relatively privileged position, benefiting from some very old contracts over North Sea fields struck at low prices dating from the 1990s. Mr Trimble reckons that a third of the British Gas portfolio is made up of old supply contracts. It also has the benefit of Morecambe Bay, a major gasfield that is now in decline but still provides British Gas with a cushion.
“Almost no one else has got that [benefit],” Mr Trimble said. They should be much better off than the other [utilities].”
From the details coming out of Ashgabat in Turkmenistan and Moscow over the weekend, it is apparent that the great game over Caspian energy has taken a dramatic turn. In the geopolitics of energy security, nothing like this has happened before. The United States has suffered a huge defeat in the race for Caspian gas. The question now is how much longer Washington could afford to keep Iran out of the energy market.
Gazprom, Russia's energy leviathan, signed two major agreements in Ashgabat on Friday outlining a new scheme for purchase of Turkmen gas. The first one elaborates the price formation principles that will be guiding the Russian gas purchase from Turkmenistan during the next 20-year period. The second agreement is a unique one, making Gazprom the donor for local Turkmen energy projects. In essence, the two agreements ensure that Russia will keep control over Turkmen gas exports.
The new pricing principle lays out that starting from next year, Russia has agreed to pay to Turkmenistan a base gas purchasing price that is a mix of the average wholesale price in Europe and Ukraine. In effect, as compared to the current price of US$140 per thousand cubic meters of Turkmen gas, from 2009 onward Russia will be paying $225-295 under the new formula. This works out to an additional annual payment of something like $9.4 billion to $12.4 billion. But the transition to market principles of pricing will take place within the framework of a long-term contract running up to the year 2028.
The second agreement stipulates that Gazprom will finance and build gas transportation facilities and develop gas fields in Turkmenistan. Experts have estimated that Gazprom will finance Turkmen projects costing $4-6 billion. Gazprom chief Alexei Miller said, "We have reached agreement regarding Gazprom financing and building the new main gas pipelines from the east of the country, developing gas fields and boosting the capacity of the Turkmen sector of the Caspian gas pipeline to 30 billion cubic meters." Interestingly, Gazprom will provide financing in the form of 0% credits for these local projects. The net gain for Turkmenistan is estimated to be in the region of $240-480 million.
From all appearance, Gazprom, which was headed by Russian President Dmitry Medvedev for eight years from 2000 to May 2008, has taken an audacious initiative. It could only have happened thanks to a strategic decision taken at the highest level in the Kremlin. In fact, Medvedev had traveled to Ashgabat on July 4-5 en route to the Group of Eight summit meeting in Hokkaido, Japan.
Curiously, the agreements reached in Ashgabat on Friday are unlikely to enable Gazprom to make revenue from reselling Turkmen gas. Quite possibly, Gazprom may now have to concede similar terms to Kazakhstan and Uzbekistan, the two other major gas producing countries in Central Asia. In other words, plain money-making was not the motivation for Gazprom. The Kremlin has a grand strategy.
Coincidence or not, Russian Deputy Prime Minister Igor Sechin traveled to Beijing at the weekend to launch with his Chinese counterpart, Vice Premier Wang Oishan, an energy initiative - a so-called "energy negotiation mechanism". The first round of negotiations within this framework took place on Saturday in Beijing. There has been an inexplicable media blackout of the event, but Beijing finally decided to break the news. The government-owned China Daily admitted on Monday, "Both China and Russia kept silent on the details of the consensus they reached on energy cooperation in the first round of their negotiation in Beijing on the weekend."
Without getting into details, China Daily merely took note of the talks as "a good beginning" and commented, "It seems that a shift of Russia's energy export policy is under way. Russia might turn its eyes from the Western countries to the Asia-Pacific region ... The cooperation in the energy sector is an issue of great significance for Sino-Russian relations ... the political and geographic closeness of the two countries would put their energy cooperation under a safe umbrella and make it a win-win deal. China-Russia ties are at their best times ... The two sides settled their lingering border disputes, held joint military exercises, and enjoyed rapidly increasing bilateral trade."
It is unclear whether Gazprom's agreements in Ashgabat and Sechin's talks in Beijing were inter-related. Conceivably, they overlapped in so far as China had signed a long-term agreement with Turkmenistan whereby the latter would supply 30 billion cubic meters of gas to China annually for the 30-year period starting from 2009. The construction work on the gas pipeline leading from Turkmenistan to China's Xinjiang Autonomous region has already begun. China had agreed on the price for Turkmen gas at $195 per thousand cubic meters. Now, the agreement in Ashgabat on Friday puts Gazprom in the driving seat for handling all of Turkmenistan's gas exports, including to China.
Russia and China have a heavy agenda to discuss in energy cooperation far beyond the price of Turkmen gas supplies. But suffice it to say that Gazprom's new stature as the sole buyer of Turkmen gas strengthens Russia's hands in setting the price in the world gas (and oil) market. And that has implications for China. Moscow would be keen to ensure that Russian and Chinese interests are harmonized in Central Asia.
Besides, Russia is taking a renewed interest in the idea of a "gas cartel". Medvedev referred to the idea during the visit of Venezuelan President Hugo Chavez to Moscow last week. The Russian newspaper Nezavisimaya Gazeta reported on Friday that "Moscow finds the idea of coordination of gas production and pricing policy with other gas exporters to be too tempting to abandon". The daily quoted Miller as saying, "This forum of gas exporters will set up the global gas balance. It will give answers to the questions concerning when, where and how much gas should be produced."
Until fairly recently Moscow was sensitive about the European Union's opposition to the idea of a gas cartel. (Washington has openly warned that it would legislate against countries that lined up behind a gas cartel). But high gas prices have weakened the European Union's negotiating position.
The agreements with Turkmenistan further consolidate Russia's control of Central Asia's gas exports. Gazprom recently offered to buy all of Azerbaijan's gas at European prices. (Medvedev visited Baku on July 3-4.) Baku will study with keen interest the agreements signed in Ashgabat on Friday. The overall implications of these Russian moves are very serious for the US and EU campaign to get the Nabucco gas pipeline project going.
Nabucco, which would run from Turkey to Austria via Bulgaria, Rumania and Hungary, was hoping to tap Turkmen gas by linking Turkmenistan and Azerbaijan via a pipeline across the Caspian Sea that would be connected to the pipeline networks through the Caucasus to Turkey already existing, such as the Baku-Tbilisi-Ceyhan pipeline.
But with access denied to Turkmen gas, Nabucco's viability becomes doubtful. And, without Nabucco, the entire US strategy of reducing Europe's dependence on Russian energy supplies makes no sense. Therefore, Washington is faced with Hobson's choice. Friday's agreements in Ashgabat mean that Nabucco's realization will now critically depend on gas supplies from the Middle East - Iran, in particular. Turkey is pursuing the idea of Iran supplying gas to Europe and has offered to mediate in the US-Iran standoff.
The geopolitics of energy makes strange bedfellows. Russia will be watching with anxiety the Turkish-Iranian-US tango. An understanding with Iran on gas pricing, production and market-sharing is vital for the success of Russia's overall gas export strategy. But Tehran visualizes the Nabucco as its passport for integration with Europe. Again, Russia's control of Turkmen gas cannot be to Tehran's liking. Tehran had keenly pursed with Ashgabat the idea of evacuation of Turkmen gas to the world market via Iranian territory.
There must be deep frustration in Washington. In sum, Russia has greatly strengthened its standing as the principal gas supplier to Europe. It not only controls Central Asia's gas exports but has ensured that gas from the region passes across Russia and not through the alternative trans-Caspian pipelines mooted by the US and EU. Also, a defining moment has come. The era of cheap gas is ending. Other gas exporters will cite the precedent of the price for Turkmen gas. European companies cannot match Gazprom's muscle. Azerbaijan becomes a test case. Equally, Russia places itself in a commanding position to influence the price of gas in the world market. A gas cartel is surely in the making. The geopolitical implications are simply profound for the US.
Moreover, Russian oil and gas companies are now spreading their wings into Latin America, which has been the US's traditional backyard. During Chavez's visit to Moscow on July 22, three Russian energy companies - Gazprom, LUKoil and TNK-BP - signed agreements with the Venezuelan state-owned petroleum company PDVSA. They will replace the American oil giants ExxonMobil and ConocoPhillips in Venezuela.
At the signing ceremony, Medvedev said, "We have not only approved these agreements but have also decided to supervise their implementation." Chavez responded, "I look forward to seeing all of you in Venezuela."
Ambassador M K Bhadrakumar was a career diplomat in the Indian Foreign Service. His assignments included the Soviet Union, South Korea, Sri Lanka, Germany, Afghanistan, Pakistan, Uzbekistan, Kuwait and Turkey.
'Wear two jumpers' was the advice recently given to British homeowners facing higher gas bills by Jake Ulrich, managing director of Centrica Energy, part of the group that owns British Gas.
More recently, Ian Marchant, chief executive of Scottish & Southern Energy, warned that there would be further price hikes in our gas and electricity bills even before winter. Then, on Friday, EDF announced that it would be increasing gas prices to its UK customers by 22pc, blaming wholesale energy costs for the latest price hike.
Although the price of oil has fallen back from its $147-a-barrel high, Britain's leading energy companies still expect consumers to face bigger energy bills this year. MPs are unhappy. Yesterday they claimed that the market is not functioning properly and urged the Government to introduce a windfall tax on utility companies to help families.
However, a battle for political supremacy in far-off Ukraine is likely to have just as big an influence on European gas prices in coming months as the fluctuations on global energy markets.
Britain now imports 21bn cubic metres of gas every year since its North Sea reserves started falling. Some imports come by ship as liquified natural gas and some has to be bought in the European markets which is then piped over to the UK mainland from the Continent.
But much of Europe's gas is imported from Russia through pipelines that cross Ukraine. It is the control of those pipelines that is now the subject of a tense political tussle between Ukraine's President Victor Yushchenko and his former ally turned rival, Prime Minister Yulia Tymoshenko.
At the heart of the politicians' struggle is an oligarch whose influence will play a major part in dictating the price of gas in Britain's wholesale markets.
President Yushchenko believes the existing arrangements should remain and that current prices for gas transit payments should not be reviewed. He believes that the existing deal, whereby 55bn cubic metres of gas are delivered to Ukraine at $179.50 per cubic metre, is the best possible one. But he faces formidable opposition.
Behind Tymoshenko's plan, known in Ukraine as the "change of concept", is Gayduk. Like Tymoshenko, Gayduk was formerly an ally of President Yushchenko but has fallen out with him over the gas transit question.
Tymoshenko made Gayduk her chief adviser earlier this year. He is the head of a business conglomerate called the Donbass Industrial Union (DIU) but little else is known about "the quiet Donetskian", as he is called, except that he is one of Ukraine's most powerful oligarchs.
He made his fortune, estimated to be in the region of $5bn, between 1998 and 2001 supplying gas to the Donbass region, where half of Ukraine's industry is located.
A Tymoshenko representative, however, states that her critics are wrong to focus on Gayduk. "Tymoshenko's long-term strategy is all about transparency," he said. "We've always said there should be no middleman. It is better if Ukraine's state agency NaftagasUkraini can buy direct from Russia. I've never heard of any suggestion that Vitaly Gayduk would be involved."
The political conflict between Tymoshenko and Yuschenko is expected to come to a head at the next presidential elections, likely to be held in November. According to a broad range of western and Ukrainian political analysts, if Tymoshenko replaces Yuschenko as president, or manages to usurp presidential power to her prime minister's office, she will implement her plans to change the gas transit arrangements.
"The result of there being no middleman will be that direct gas supplies from Russia will actually increase the price of gas, not decrease it," says Weiss. "Russia will have a greater influence on the price of gas. Ukrainian industrialists will then lobby for a new middleman. The new middleman will be Gayduk and DIU."
Tymoshenko has claimed that changing how gas is transported across Ukraine is a fight against "Gazprom's and the Kremlin's price dictatorship", but her apparent opposition to the Kremlin is at odds with her ally Gayduk's connections in Russia. He is close to the Russian gas exporter Gazmetall which in turn has close connections to the Kremlin.
Gayduk's DIU business has been attempting to negotiate a merger with Gazmetall whose leaders - principally Alisher Usmanov - are very close to the Kremlin's ruling elite under Dmitry Medvedev and, formerly, Vladimir Putin. Under the presidency of Medvedev in Moscow, the activities of Gazmetall in Ukraine have been growing significantly.
Another partner of DIU is Andrei Kostin, head of Russia's state bank, Vneshtorgbank, and a close friend of Putin. Gayduk also has close connections with Chelsea Football Club owner Roman Abramovich and Alexander Abramov, who together own the Russian steelmaker Evraz.
This Russian and Ukranian political intrigue over who controls the gas being piped to us in the West comes at a time when Western Europe's home-grown production of gas is in steep decline.
According to statistics from Eurogas, production fell by 4.9pc in 2006 and by 7pc in 2007, and this fall in production is set to continue ever more sharply. Norway is the main indigenous provider of gas in Western Europe, supplying 18pc of the EU's needs.
The UK's 21bn cubic metres of imported gas each year is steadily rising, while at the same time Western Europe's indigenous gas production declines. Already 10 EU countries are almost entirely dependent for their natural gas supplies on Russian and CIS gas production, with Ukraine as the transit country.
Ukraine is the vital link for Western Europe, and the prices we pay for the transit of gas - as well as the price for the gas itself - will be reflected in our industrial and domestic bills.
We can try wearing an extra jumper this winter, but the price of gas looks as if it is rising inexorably and the obscure political and business machinations in Ukraine will play an important part.
Vitaly Gayduk has made a huge personal fortune in gas trading and ownership of Ukrainian energy companies. But he is not simply a businessman, he is playing a pivotal role in a looming political crisis that threatens to send gas prices higher.
His influence on the Russian and Ukrainian gas markets that are so key to the UK came to the fore in the recent "gas wars" between Russia and Ukraine in which Russia sought to use its energy leverage for political gain, a tactic it has used several times with EU countries such as Lithuania. It was Gayduk who negotiated a solution to the row.
President Yushchenko and Prime Minister Tymoshenko, former allies since the Orange Revolution in 2004, are locked in a mounting conflict over the price of the gas that is piped across the Ukraine. The country's role as the transit country for 73pc of Western Europe's gas being exported by Russia and the CIS countries makes it vital to the EU's energy markets. What happens in the Ukraine affects what happens further west.
At the heart of the conflict is Tymoshenko's desire to abolish an intermediary arrangement that currently involves gas coming from Russia passing through a Ukrainian company called RosUkrEnergo. Instead she plans to buy gas directly from Russia and the CIS countries, through NaftagasUkrainy, controlled by her government. This is a move that most independent analysts agree will raise the price of gas for consumers in Western Europe.
"Such a course, abolishing a middleman, will increase the price of natural gas and will cause instability in the Ukraine", according to Lidia Lowson at the American Centre for Political Monitoring. "From this instability Tymoshenko will be able to impose her own middleman to calm the situation. That man will be Gayduk."
When contacted, Gayduk's office said he was unavailable for comment.
The reason that the price of gas will rise if bought directly rather than through an intermediary is that its price will be fixed by governments - principally Ukraine's and Russia's - rather than by organisations that operate through commercial criteria.
"Without an intermediary, the governments of Tymoshenko and [Dmitry] Medvedev will be able to dictate prices," Inna Weiss of the Central Group of European Political Monitoring says. "With the existing situation there is a clear interest in co-operation and good relationships with Western Europe. That is what Yushchenko represents."
Last week Alexei Miller, chairman of Gazprom, met with Tymoshenko to discuss the gradual rise in the price of gas from $179.50 to more than $400 per cubic metre.
China's sprawling industrial heartland is braced for an electricity crisis as the closure of unsafe coalmines before the Olympic Games and the rising price of coal have left many power stations either without the fuel they need or unable to make a profit.
Energy experts believe that China's coal shortage could trigger its worst spate of blackouts and brownouts in four years, hitting the metals and manufacturing sectors especially hard.
Coal generates 80 per cent of the country's power and has been the predominant fuel of China's economic boom. State energy authorities have given warning of long-term coal deficits at power plants in the world's second-largest energy user. China, also the world's biggest consumer of coal, could continue to face coal-related disruptions into the winter.
Transportation issues, typhoons and widespread pit closures have left many power stations without enough coal to fire their generators.
Across China, 51 power plant units have been closed because of the lack of coal, removing almost 3 per cent of national capacity and prompting electricity rationing in 14 provinces.
Yesterday, the State Grid Corporation of China said that 46 per cent of the stations connected to its grid had coal stockpiles below the official “caution line”, enough to last only seven days.
Central Government is expecting an overall power shortfall of about ten gigawatts over the summer, but the combined forecasts of the country's individual provinces suggest that the real shortage could be more than three times as severe.
The underlying coal shortage is partly linked to China's desire for the success of the Olympic Games. Coalmining in China has long been a notoriously dangerous business and the cause of about 4,000 deaths last year.
A drive to improve safety began months ago, but with the Olympic Games and international scrutiny looming, the Government is particularly keen to minimise the risk of a high-profile mining disaster occurring during August.
Dozens of pits, particularly in Shanxi province, have been closed because they have failed to pass more stringent safety regulations. Officials have promised stricter supervision in July and August, even for those pits that have met the new requirements. Other pits have been closed because of the cost of reducing pollution.
China has faced power shortages before but Andy Rothman, chief China economist at CLSA, said that the potential crisis this summer was different. Previously, China built power stations as demand outstripped the nation's total generation capacity. This time, plants are shutting down because of a lack of coal and hugely inflated prices.
Runaway coal prices have shattered the business models of many power stations, quickly converting profit to loss because of government caps on what consumers pay for their power.
Thermal coal prices have risen by as much as 80 per cent since January. Beijing, meanwhile, allowed power tariffs to rise only 4.5 per cent in June - an increase shared between both the grid and the generators.
Commodities analysts are also factoring in the possibility that China's status as a net exporter of coal could be on the point of reversal. As with other natural resources such as phosphorus, the Chinese Government is increasingly keen to keep more of its coal at home and may consider importing coal to protect domestic supplies.
Analysts added that the coal shortages would skew their ability to forecast Chinese growth at a critical time for the global economy.
Residents and industries in the twin cities are suffering due to erratic power cuts for the past two weeks. Even though Hescom has not declared official cuts for industry , unscheduled blackouts for 8-10 hours are being imposed in several areas. Extension areas are no better where cuts of even lengthier duration are imposed.
Residents rued that unannounced power cuts affect their daily work. "Cuts are being imposed without notice . It seems there is no end to this problem. The last few years have only witnessed worsening of the power situation and I dread to think what we'll have to face in summer," said homemaker Sumitha Patil.
The worst affected are commercial and shopping centres which have been badly affected by the routine blackouts. Many have resorted to generator sets which add to the pollution.
There's disquiet in industry circles over the crisis. They are suffering not only on account of decline in production but also rise in costs and deterioration of quality of goods produced .
Industrialists point out that poor power supply badly hit small-scale enterprises which can't afford alternative power generation. "Using gensets is expensive. For small industrialists , it means additional cost," an industrialist said.
Some industries like induction and furnace and electroplating suffer heavy losses as the processes followed there are such that if there's a power cut, the process has to be restarted from scratch.
The Karnataka Chamber of Commerce and Industry said that power cuts are unscheduled and hit all categories of industries.
"We have recommended to Hescom officials that it would be better if industries are informed of cuts in advance, even if they are for maintenance ," said KCCI member Mohan Tenginkai.
KPTC and other central grids are finding it difficult to supply enough power due to the fall in the levels in the water reservoirs because of weak monsoon over the past two weeks. However, the good downpour in catchment areas over the past few days should bring some relief.
Auctioning off the right to emit carbon dioxide is likely to net the government nearly €2.5bn (£2bn) over the next four years, under plans to be announced today.
The terms on which the emissions permits will be sold for the first time this year will be set out by the Department for Environment, Food and Rural Affairs and the Treasury.
The power sector will be most affected, as electricity generators will have to buy almost a third of their permits to produce carbon, instead of receiving them all free of charge as they have done since 2005, when the European Union's emissions trading scheme started.
Other sectors in the scheme, such as steelmakers and cement-makers, will continue to receive all of their permits for nothing, at least until 2013.
However, the government has yet to set the date for the first annual auction to begin.
Phil Woolas, environment minister, said: "Auctioning [permits] marks an important step forwards in developing a system where market forces create financial incentives for major carbon emitters to reduce their emissions. This will help stimulate the development of green technology and British business can begin to realise the benefits of being leaders of the low carbon revolution."
Paying for permits should not prompt power producers to raise their prices, however, as the cost of buying permits has already been factored into electricity prices since 2005.
Some 85m permits - about 7 per cent of the total number of permits allocated to UK companies in the current phase of the scheme - will be auctioned by 2012. But the government plans to "frontload" the auctions so that more are sold this year and next year than in 2011-12.
Yesterday's price for this year's permits stood at about €25, with permits for 2012 selling in the forward market at nearly €30.
At these prices, the permit auctions would yield the government between €2.1bn and €2.4bn in total by 2012.
The next phase of the scheme, from 2013, is likely to swell the government coffers by much more. Paul Klemperer, professor of economics at Oxford University, estimates that the government would gain about £2bn a year from auctioning permits if the power sector were forced to buy all its permits, as the European Commission proposes.
Under the government's plans for the first permit auction, bidders will be given two months' notice of the auction date. The auction will run for a few days at most, and bidders will submit their bids, detailing how many permits they want to buy and at what price, electronically. The auctions, which will be open to banks and brokers as well as companies covered by the trading scheme, will be administered by the UK Debt Management Office.
Once all the bids are in, the government will calculate a single settlement price for all the permits available. This will be done by taking the lowest price at which all the permits can be sold to the bidders.
Dear Gordon Brown: I know that you have packed your bucket and spade so you can go to the beach at Southwold, but I also know you'll have taken your computer - since the volume of emails that emanates from your machine is feared throughout Whitehall. So perhaps you're even reading this online. Now, I know it's unusual for you to find political advice in the Technology section, but this matters both to you and to us.
The bit that matters to you is getting re-elected, or at least raising your popularity rating above the level where a doctor declares it dead. The bit that matters to us is knowing we'll be able to afford to heat and light our homes in the future.
Everyone's been carping about your leadership, which is a bit unfair since you've put in place ministers who are far more turned on to the internet generation than Tony Blair ever did: Tom Watson, Michael Wills, Jim Knight and Baroness Vadera are all making a difference. But when there's a dismal byelection defeat and all ministers say is that they'll "listen and learn", people feel there's no leadership going on.
What we actually want is some idea that Britain knows where it's going. And the one area where that really, really matters is energy. The airwaves are full of another warning that energy prices are going to rise again, and that perhaps Britain's wholesale market for energy is broken. This matters to people.
Which is where you come in with the "leadership" bit. Look, good leaders don't do "listen and learn". They lead. They provide a vision, and they can pull an entire country along with them.
Now, here's the wrong way to do "leading" over energy. When oil prices leapt up earlier this year, you said you would tell the Gulf states to pump some more oil. Where's the leadership in that?
Real leadership would be to stand up and say: "The price of oil now is above $100 per barrel. At some time in the future it will rise to $200, and then $400 per barrel. This is simple economics: it is a finite resource for which there is increasing demand.
"The 2006 energy review consultation said that by 2020 we will import three-quarters of our primary energy. And Deloitte said in February 2006 that by 2020 we'll need more than 50 gigawatts of energy generating capacity - about two-thirds of current capacity: that's 30 nuclear power stations, or 40,000 offshore wind turbines.
"So Britain faces a challenge: how to secure our energy supplies. North Sea oil is running dry. We cannot just import gas and oil. If we carry on there will come a point when we cannot afford to heat and light our homes and offices.
"The challenge for us, the British people, is to make ourselves as energy-independent as possible. Just as the US space programme challenged the ingenuity of that country in the 1960s, this will challenge us. To encourage use of solar energy, we will adopt the German model by which owners of solar cells profit from selling surplus energy to the national grid. Offshore wind turbines and tidal energy systems will get tax breaks, funded by money from petrol taxes and a windfall tax on oil company profits. We'll insulate more homes than ever before. We are not going to be reliant on other people for our electricity.
"It's going to take sacrifice and it's going to cost money, but that will be saved against the spiralling prices we would have to pay in the future. The time to start is not when oil reaches $200 or $300 or $400 per barrel; it is now, when it is relatively cheap. Energy independence is the key to an affordable future for us and our children. So we start today."
See? I think I've even got the style. You can set the timescale. Ten years would be a start. And I'd move quickly. I hear David Cameron's handy with email too, and he can spot a good idea as well as anyone.
Senate Democrats for the second day in a row failed to get sufficient support for legislation that would extend tax credits for renewable energy facilities.
The 51-43 vote Wednesday blocks debate on the legislation extending tax credits that expire this year for wind, solar and biomass projects. It needed 60 votes to advance. A vote Tuesday on a similar tax measure approved by the House also failed to get the 60 votes needed.
Democrats have been unable to move forward on other legislative proposals since last week, when Republicans blocked a measure to limit debate on an energy speculation bill. Republicans want to broaden the speculation bill to include other energy proposals, including expanded offshore oil drilling.
Also Wednesday, the Bush administration threatened to veto legislation that would expand the authority of the Commodity Futures Trading Commission in an effort to reduce speculation in energy markets.
The measure "offers poorly targeted short-term measures that do nothing to address the fundamentals of supply and demand that bear the primary responsibility for current high energy prices," according to a statement of administration policy. "The bill will hurt the competitiveness of American futures markets."
Spain has launched an ambitious plan to reduce energy consumption and save millions of euros on oil imports by cutting the speed limit to 50mph and handing out millions of low-energy use light bulbs.
With the introduction of a broad swathe of measures between now and 2014, Spain's socialist government hopes to reduce Spain's oil imports by 10% per year, cutting consumption by 44m barrels and saving €4.14bn (£3.25bn).
During the country's sweltering summers, air conditioning systems in public buildings will be set no lower than 26C (79F). In winter, Spaniards will be allowed to turn the heating no higher than 21C (70F), with hospitals being the only exception.
Street lighting is to be reduced by up to 50% and the metro system in many cities will stay open later at weekends to encourage people to leave the cars at home. The government is also to introduce a pilot project for the manufacture of 1m electric or hybrid cars.
All Spanish government vehicles are to meet at least 20% of their energy needs through biofuels.
And in an unprecedented move, commercial airlines will be able to use military air routes to make journeys 20% shorter. The comes after Ryanair and easyJet announced they are to cut routes to Spain, blaming rising fuel costs.
Among European countries Spain has the highest dependency on fossil fuels, which meet 84% of its energy needs. In the past year, Spain spent €17bn importing oil.
The rising price of oil has led to inflationary pressures and caused the country's trade deficit to balloon by 13% this year to €42.8bn.
The €245m energy plan was unveiled by industry minister Miguel Sebastián, and in an effort to encourage Spaniards to be more energy conscious, the minister borrowed a phrase from JFK.
"Ask not what your country can do for you, ask what you can do for your country."
The speed limit will be cut on dual carriageways outside major cities by 20%, bringing it in line with Barcelona, which has already set a top speed of 80 km/h (50 mph).
"Every time we lift our feet off the accelerator, we are improving GDP and employment," Sebastián said. "The era of cheap energy has passed."
But a straw poll of Spanish motorists conducted by Spanish television channel Telecinco found gas guzzlers proved to be in the majority.
Manolo, from Madrid, said: "Tell the minister that things are just fine as they are. We don't want to cut our speed. People would be honking their horns all the time if they had to go that slow."
Sebastián recently created a stir when he appeared in parliament without a tie in an effort to encourage deputies to cut the air conditioning bill and save energy. He was ordered by the speaker to dress properly.
The government will hand out 49m free energy-saving light bulbs – two for each household – to try to convince Spaniards to reduce energy bills. By 2012, all light bulbs are expected to be low-energy.
It wasn't the sound of his car engine that was distracting Ian Clifford. The chief executive of Canadian business Zenn Motors makes electric vehicles that give off no noise. He was worried that the obvious choice to power his next car - the same stuff that goes into laptops and cellphone batteries - was going to be in short supply.
"If you look at the increase in lithium prices over the past seven to 10 years, it's been dramatic," says Clifford. Zenn's short-range urban cars traditionally used nickel metal hydride (NiMH) batteries, but his next vehicle - an 80mph model with a 250-mile range - needed more efficiency. "There are very limited global reserves, and they're in potentially very unstable parts of the world," adds Clifford.
Supplies under strain
The US moved the previously obscure chemical element to centre stage in the 1950s when its lithium-hungry H-bomb programme kickstarted world production. The rising popularity of lithium-ion (Li-Ion) in batteries has sent demand soaring again, and pundits now worry that electric cars will strain our supplies.
Your laptop might use six finger-sized Li-Ion cells in its battery, but US-based Tesla Motors bolts together 6,000 cells to power one of its high-end electric sports cars. Now others, drawn to Li-Ion's light weight and high capacity, are joining in. Toyota's Prius hybrid electric vehicle (HEV) runs on a small battery powered by braking energy that switches to petrol when it runs out. The group will switch its Nickel Metal Hydrid (NiMH) chemistry to Li-Ion in 2010. GM will be putting Li-Ion batteries in the Volt, its plug-in hybrid electric vehicle (PHEV) due out the same year. Other vendors also promise PHEVs, which are similar to HEVs, but with a larger, plug-in battery. Many will take the Li-Ion approach.
So how much lithium do we have? 1m tonnes of lithium metal is used to produce 5.3m tonnes of lithium carbonate, says Brian Jaskula, an analyst at the US Geological Survey (USGS), which goes into Li-Ion batteries.
Data from USGS puts total world resources of lithium metal at around 14m tonnes. The total world resource includes all the lithium metal we know about, whether it is commercially viable to extract it or not. But the USGS data is based on a 1976 National Research Council report.
A lot has changed in 32 years. Back then, most lithium came from a mineral called spodumene. But in 2001 SQM, a large mining group, began producing it in huge volumes by extracting it from salars - salt flats through which water has leached. The cheaper process sent prices plummeting and put many spodumene mines out of business.
"That was the last time that an organisation got together to do that type of research," Jaskula notes. But now two independent researchers are hoping to update the facts. In the pessimist corner is William Tahil, research director at Meridian International Research, who predicted two years ago that demand for lithium in cars would outpace supply. "There is no surplus lithium carbonate available for the automotive market. It's all being used by existing industrial applications," he says.
His report provoked a rebuttal from retired industry veteran Keith Evans, who worked on the original 1976 report. In March, he released An Abundance of Lithium, claiming a world resource of 28m tonnes, almost half of which he says could be extracted commercially (worldlithium.com). This would produce nearly 74m tonnes of lithium carbonate. "Tahil's argument that the world is short of lithium carbonate is wrong," Evans says. Two months later, Tahil released an even more pessimistic report, claiming that economically viable lithium metal reserves were just 4m tonnes. Evans is due to respond with a further rebuttal soon. Who is correct?
"Tahil considers that the total world lithium reserves are 4m tonnes," says an insider at SQM, which produces 37% of the world's lithium carbonate. "However, SQM's proven and probable in situ reserves alone total 5m tonnes."
Tahil, who still stands behind another report he wrote in 2006 claiming that the World Trade Center was felled by underground nuclear explosions, also dismisses the potential extraction of lithium from hectorite, a type of clay. But Western Uranium Corporation, a Canadian group, is testing recovery methods that it says could be worth 2m tonnes of lithium. Tahil has also largely dismissed the option of recycling lithium carbonate from Li-Ion batteries.
Disagreements over lithium reserves aside, the other debate is about how much lithium we can produce from our reserves, and whether it can match the growth of the car industry. Analysts say that we won't be needing 17m lithium-powered cars for a considerable time.
Anjan Hemanth Kumar, an analyst with Frost & Sullivan, says Europe will be the biggest market for electric vehicles, and he predicts that there will be some 250,000 vehicles in Europe by 2015. The US and Europe combined will have about 160,000 PHEVs by then. And Li-Ion battery vendor Hitachi says that most hybrid vehicles will use NiMH batteries until 2015.
Prices powering forward
But there have been some recent speed bumps in the largely opaque lithium market, which relies on bilateral sales agreements rather than commodity exchanges. "There's a difference between long-term availability and short-term supply," warns Nicholas Lenssen, practice director for distributed and renewable energy at IDC. "There are definitely concerns over short-term supply." According to Roskill, which provides information on metals and minerals markets, the price of lithium carbonate rose by 48%. An additional problem was a fire at Matsushita's Japanese ithium-ion battery plant in Japan last September, and another at South Korean LG Chem on March 3.
Nevertheless, suppliers and observers are confident. "There seems to have been a big change at the end of 2007," says Jaskula, who tracks supply and demand. "It seems to be largely due to the Chinese. They're inputting their production capabilities, and they may be releasing more stuff that was stockpiled." And SQM, which produces more than a third of the world's lithium carbonate, has 12,000 tonnes per year of spare capacity at present, with permits to increase it.
Lenssen nevertheless warns that an electric vehicle market that has been on-and-off for the past decade, combined with the conservatism of the auto industry, could put producers and consumers of lithium out of sync. "For those investments to be made, folks have to have a degree of certainty that in fact this time, these vehicles are going to happen and that oil prices, or more particularly retail prices for petroleum products, will remain high," he says.
Peak oil advocates will worry that in spite of Kumar's analysis, we'll be forced to embrace Li-Ion in the coming years because oil will simply run out. But Bill van Amburg of research organisation Weststart-Calstart says that lithium won't have to support the auto industry on its own. "You'll have more efficient cars, alternative fuel, blended fuel, then the hybrids and electric drives, and all of them will have their piece of the wedge," he says.
Clifford is already taking the road less travelled. Zenn has invested $2.5m (£1.2m) in eeStor, a Texas-based ultracapacitor group. Ultracapacitors are storage devices traditionally used for delivering large kicks of power, but they have little long-term energy capacity. eeStor promises to deliver one that stores as much energy as a lithium battery at less than half the weight - and with a charging time of under 10 minutes. Lockheed Martin has already signed an exclusive licence to use it in military applications.
Other technologies are being investigated by carmakers too. Last year, Tata Motors, the Indian carmaker, gave MDI, a company started by a former Formula One engineer, €20m (£15.8m) for the rights to build cars based on its compressed air design. Both Zenn and MDI's US subsidiary ZPN hope to have cars housing their new technologies on the roads by 2010.
Fossil fuel cars are unlikely to disappear just yet. But as we seek cleaner transport, other technologies are just around the corner.
British Airways and Iberia, the Spanish flag carrier, announced today that they are seeking a merger that would create one of Europe's largest airlines.
BA, which owns 13.15 per cent of Iberia, partnered with TPG, the private equity firm, last year in an attempt to buy the Spanish airline but the deal fell through.
The combination of BA and Iberia would create a carrier that is dominant on the North and South Atlantic routes. BA has traditionally been strong on routes from Heathrow to the US while Iberia has strong links with South America.
Willie Walsh, British Airways’ chief executive, said: “The aviation landscape is changing and airline consolidation is long overdue.
"The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment. We’ve had a successful relationship with Iberia for a decade and are confident that both companies’ shareholders would benefit from the proposed tie-up."
Iberia said today that it had acquired 2.99 per cent of BA and had "financial exposure" to a further 6.99 per cent, although it did not explain how these shares were held.
Shares in BA rose 6.3 per cent to 249p today.
BA is set to announce its first-quarter results on Friday and analysts expect the airline to give a more precise estimate on its likely profitability this year.
Martin Broughton, chairman of BA, gave warning two weeks ago that the carrier would struggle to make a profit as high oil prices have eroded margins.
Analysts believe BA may cut its profit estimate from break even to £50 million, down from £875 million last year.
The first quarter may look particularly bad as oil hit a record high during the period and BA will also have to factor in additional costs from its move to Heathrow's Terminal 5.
Ryanair lost more than a fifth of its value this morning after the no-frills airline revealed it had dived into the red in the first quarter as fuel costs soared.
The airline, which fell to a €90.5m loss in the first quarter, warned shareholders today that it could record a loss for the full-year of up to €60m if oil remains high and fares fall.
The news hammered shares across the airline sector. Ryanair tumbled 22pc to €2.50, easyJet was down 8pc and British Airways fell almost 4pc to 237.5p.
The more than doubling in oil prices in the past 12 months is shaking the airline industry and has led many analysts to forecast some carriers will go bust.
Ryanair, which took its inspiration from the US carrier Southwest, had earlier predicted it would manage to break even this year despite growing headwinds.
Ryanair said yields, or average ticket prices, could fall as much as 5pc in the full year as it lowers fares to attract more passengers.
Chief executive Michael O'Leary said: "The emerging economic recession in the UK and Ireland caused by the global credit crisis and high oil prices means that consumer confidence is plummeting, and we believe this will have an adverse impact on fares for the rest of the year."
Oil prices almost doubled in the first quarter from $61 a barrel to $117, driving Ryanair's fuel bill up 93pc to €375m. Fuel now represents almost 50pc of total operating costs, up from 36pc last year.
The carrier said it was hedged at 90pc for September at $129 a barrel, and 80pc hedged for the third quarter at $124 a barrel.
Ryanair is not hedged for the fourth quarter, but insisted that it would not pass on any oil price rises to its 58 million passengers through fuel surcharges, and would absorb higher costs even if it means short-term losses. Mr O'Leary said he did not believe oil prices at $130 a barrel were not sustainable.
"If this airline is going to survive and prosper, it's got to double its fares, its got to do what other airlines are doing and cut capacity," said Howard Wheeldon, an analyst at BGC Partners.
In order to survive the spiralling cost of fuel, Ryanair is "aggressively tackling" costs elsewhere in the business, including a company-wide pay freeze and redundancies at its Dublin call centre.
Ryanair is pressing ahead with its controversial plans to allow passengers to use their mobile phones and Blackberry's during flights. The airline will shortly be trialing the service on 10 Dublin-based aircraft, rolling it out to almost 40 planes by the end of the year.
Adjusted net profits in the first quarter - which excluded exceptional costs of €17.9m on 15 aircraft to be disposed of in 2009/10 and a €93.6m writedown of the airline's Aer Lingus stake - tumbled 85pc to €21m.
Ryanair plans to cut flight capacity this winter, because an increase in airport charges at Dublin and Stansted will make it more profitable to ground some of its aircraft than fly, the airline said.
Adjusted net profits in the first quarter - which excluded exceptional costs of €17.9m on 15 aircraft to be disposed of in 2009/10 and a €93.6m writedown of the airline's Aer Lingus stake - tumbled 85pc to €21m.
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